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Blair Witch Economics

October 27, 1999

Joseph Salerno, senior fellow of the Mises Institute and author of "Ludwig von Mises as a Social Rationalist" (read in .PDF), among many other articles, teaches economics at Pace University. At the most
Mises University
, he spoke about the implications of the "Blair Witch Project" for the
theory of entrepreneurship. With the film now out on video, Mises.org interviewed him on the subject.

MISES.ORG: What does the "Blair Witch" phenomenon teach us about economic theory?

SALERNO: There are varying estimates of what it cost to produce the "Blair Witch Project," but
it was somewhere between $60,000 and $100,000. In the first two or three weeks, it had already
grossed $60 million, and then $120 million in the full run. Eventually, including videos and
product spin-offs, the profits could easily reach a quarter of a billion.

From an economic point of view, this demonstrates that the resources that went into making the
film were tremendously undervalued by the market. This includes the actors as well as the
ingenuity of the writers. Just by taking these raw resources and turning it into a totally different
kind of movie, they brought about a fantastic increase in the value of these resources.

And what was the test to determine whether these film entrepreneurs made the right decision?
The consuming public. With their decision to pay to see it, they rendered the final judgement.
And it was a judgement that surprised everyone, even those most schooled in what makes a
movie work. Nobody could have predicted the success of this film.

Hence, the film not only shows
us something about the market economy; it illustrates the way profits and losses induce producers
to respond to changes in consumer tastes. The test of their success in doing so is the magnitude
of the profit.

The film demonstrates entrepreneurial genius of a special kind. It is completely different in
format and style, with no apparent precedent. The producers had the actors themselves film the
movie. It was a horror movie without blood or gore or even an identifiable monster. The
producers counted on audiences to create the terror in their own minds.

They also ran a
fantastically successful advertising campaign, which further boosted the value of the invested
resources–a nice illustration of the fact that advertising is not "waste" but rather a form of
consumer education.

MISES.ORG: Why does the Austrian view explain this better than the neoclassical view?

SALERNO: In the neoclassical view of "perfect competition," there is no innovation and all
products of each industry are identical. No resources are undervalued and there is an absence of
entrepreneurial profit. Because perfect knowledge is assumed, there are no mistakes being made
and there are no opportunities being overlooked. In fact, there is no real change at all. This is
why that model cannot explain real-world innovation.

With "Blair Witch," we have a film that is completely new and unexpected, and ends up being
more successful than all existing competitors. The Austrian view of the entrepreneur, that he is
someone who is constantly aware of, and willing to act on, undiscovered opportunities, can
account for such events because it highlights the central place of individual judgement and

Neoclassical models of economic growth also squeeze out entrepreneurship; they don’t account
for new products either. But to have genuine economic growth, you have to have an
entrepreneurial vision, and the institutional framework of private property and free markets to
realize that vision. By shifting resources (actors, script writers, editors) from undervalued uses to
more highly value uses, we increase consumer welfare.

MISES.ORG: Oddly, the film is decidedly low-tech.

SALERNO: With the pace of hi-tech development today, we might be tempted to think of entrepreneurship as
identical to technological innovation. But these are not the same thing.
Entrepreneurship consists in seeing and acting on maladjustments in the market process,
converting undervalued resources to higher-valued uses. It might go along with technological
improvement, but it doesn’t require that. In the case of "Blair Witch," the technology involved
was actually very primitive by today’s standards.

Further, it is not the capital itself which creates the profit, as if this were some automatic process.
The capital itself doesn’t accomplish anything. The cameras and film created nothing of any
economic value in themselves. The former Soviet Union, for example, was flooded with capital
goods, but they didn’t create much value. Market profits stem from the decisions, the subjective
judgements and objective actions, of entrepreneurs operating within a market-price system. This
is why Mises said profit is a spiritual and intellectual phenomenon.

Analyzing the success of "Blair Witch" helps us dispense with this idea that somehow profit
should be related by some specific ratio to the costs of production. That would be true only if the
data of the market were unchanging. In fact, in a changing economy, profits have no necessary
connection to how much it costs to make a final good.

Finally, this example demolishes the popular fallacy, accepted by many economists, that large profits in a
market economy accrue mainly to large and previously successful firms. The makers of "Blair
Witch" were outsiders, a garage-shop operation. But with their entrepreneurial insight and
willingness to take a risk, they showed up one of the largest and most capitalized industries in the

MISES.ORG: Is there any sense in which the success of Blair Witch is equilibrating?

SALERNO: The concept of equilibrium is necessary for analytical purposes, but the way in which a new
idea affects the direction of economic change cannot be explained on the basis of equilibrium.
The "Blair Witch" is precisely a radical break with routine of the past; neither is the
real-world market somehow more equilibrated as a result of the film.

The success of Blair Witch is now part of history, but peoples tastes continue to change. It
may even be the case that the next "Blair Witch" will be a terrible flop. There are no certainties
in real-life economic affairs.

MISES.ORG: What about the political implications?

SALERNO: Imagine a National Endowment for Films trying to pick which films to support and
which not to support. There is no way it could reliably imitate the success of profit-and-loss
process that made "Blair Witch" an artistic and commercial achievement. The people involved in
this project were completely unknown. They certainly would not have come to the attention of a government bureaucracy.

What an NEF would in fact do is bid up the prices of resources, including the price of actors,
script writers, and editors, and everything else that goes into making a film. All of these would
become more expensive. And because the films subsidized by government are not constrained by the test of profit and loss, the products would be of dubious

The higher prices would have put these resources beyond the reach of the people who made "Blair Witch,"
who didn’t have much money. Like all entrepreneurs, they depended on
buying undervalued resources and turning them into a product that was a great success.

MISES.ORG: Did you see the film?

SALERNO: Twice, and it was one of the scariest I’ve ever seen. I also found it to be a bitter
commentary on our times. These kids are in college, and they had no internal values. Their
vocabulary consisted mostly of profanity, and they couldn’t even come up with a coherent plan
for getting themselves out of a fix. They wandered around aimlessly and eventually turned on
each other. What could this be but an inadvertent commentary on the state of American
education today?

See the Austrian Study Guide on Entrepreneurship

Read another interview with Joseph Salerno in the Austrian Economics Newsletter.

You can write Joe Salerno at Jsale@earthlink.net.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.

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